Podcast: Aberdeen Finds that Agility is the Top Budgeting Priority for Best-in-Class Companies

February 23, 2009

Editor’s Note: Aberdeen Group Analysts David Hatch and Cindy Jutras recently released research that looks at the impact of the recession on budgeting priorities. An excerpt of the report follows and the attached podcast offers additional comments. The full report, Financial Planning, Budgeting and forecasting: Managing in Uncertain Economic Times, is available at no cost from Aberdeen’s web site through March 2009.

Today’s economic uncertainty is making it difficult to set clear goals and objectives and sustain a financial plan which supports them. Aberdeen’s survey of over 150 companies finds that organizations must become more agile with their planning, budgeting and forecasting capabilities in order to contend with a volatile environment.

Listen to the Podcast:

The business climate is characterized by change and compounded by global influences spawning distributed environments and squeezed margins. While speed, agility and accuracy dominated the business pressures driving planners in 2008, the need to improve agility to adapt to changing conditions has risen from the number two pressure last year to number one this year. While still an issue in 2009, last year’s top pressure – the need to improve budget accuracy – has plummeted to the bottom of the list for top performers, and fourth overall among all other respondents (Figure 1).

Aberdeen used four key performance criteria to distinguish the Best-in-Class from Industry Average and Laggard organizations. We evaluated the budget process itself, including year over year improvements in the cycle time, which influences the organization’s ability to finalize budgets prior to the beginning of the new fiscal period. We looked at the accuracy of the overall budget and respondents’ ability to grow profits over the last 24 months. The top 20% of performers have been identified as the “Best-in-Class” companies that are approaching their planning, budgeting and forecasting initiatives differently than Average and Laggard performers.

Successful budgeting initiatives are measured in many ways, and respondents have indicated that the cycle time from initial draft to final approved budget and forecast is important. Best-in-Class companies have reduced their cycle times by 24% in the past year-over-year period, compared to only 5% of all others. In fact Laggard companies have seen virtually no decrease at all. Interviews with respondents reveal that one of the top methods for reducing cycle time is to formalize and automate the planning, budgeting and forecasting steps and offer end users a guided step-by-step process. This is an organizational, not technological, approach to addressing process performance, and Best-in-Class companies clearly understand the difference between throwing technology at a problem vs. institutionalizing a solution within the culture of their respective companies.

The Role of Spreadsheets
Best-in-Class companies are less likely to use spreadsheets in almost every aspect of planning, budgeting and forecasting than their Industry Average and Laggard counterparts. Interestingly, 15% of all respondents report that spreadsheets remain their primary method today despite having purchased and implemented another solution or solutions intended to replace them. One of the most popular features of operational applications is the ability to export data directly to a spreadsheet application, so it is not surprising that this is the most popular role that spreadsheets play. But it is the level of control and access to this data that is critical to understand. Best-in-Class companies are far less likely to export data into manually shared spreadsheets at the initiation of a planning / budgeting / forecasting project, and are also less likely to use spreadsheets as the input mechanism for the first and possibly subsequent iterations of the overall process.

Forecasting - Lessons Learned from the Best-in-Class
The increased need for agility puts a higher priority on the ability to forecast… and re-forecast, either on a periodic basis or on demand as business conditions change. However, not all elements of the budget or plan receive the same level of focus and frequency. But the real value of re-forecasting is provided by the ability to perform “what-if” analyses. What will be the impact on the business if there is a decline or surge in revenue? How will it impact marketing staff or headcount, or research and development? Best-in-Class companies are significantly more likely to apply “what-if” scenarios during the re-forecast process, but not all elements are treated equally. Revenue, being the basic driver that fuels the business is most likely to be analyzed on this basis. In addition, the ability to align sales forecasts with the overall business revenue and cost forecasts, compensating for external (industry trends or financial indices) and internal (contract fluctuations, missed schedules, lost or late orders) are all leading indicators of whether companies will succeed or perhaps even survive in these turbulent times.

A full copy of Financial Planning, Budgeting and forecasting: Managing in Uncertain Economic Times is available at no cost from Aberdeen’s web site through March 2009.

Cindy Jutras is Vice President & Group Director and David Hatch is Research Director, Business Intelligence Research for the Aberdeen Group.

Posted by Carl · Filed Under Interviews